Latest Stories

Latest Stories

Final and Proposed Regs. Issued on 3.8% Net Investment Income Tax

Related

TOPICS

Uncategorized Article

Tax Section

Late
on Tuesday, the IRS issued final and proposed regulations
giving guidance on the application and computation of the
3.8% net investment income tax imposed by Sec. 1411 (T.D. 9644 and REG-130843-13). The final regulations
adopt, with changes, proposed regulations issued late in
2012.

Starting in 2013, Sec. 1411 imposes a tax equal
to 3.8% of the lesser of an individual’s net investment
income for the tax year or the excess (if any) of the
individual’s modified adjusted gross income for the tax year
over a threshold amount. The threshold amounts are $250,000
for married taxpayers filing jointly and surviving spouses,
$125,000 for married taxpayers filing separately, and
$200,000 for other taxpayers. The tax also applies to
estates and trusts, with different threshold amounts.

In December 2012, the IRS released proposed regulations
on the net investment income tax (REG-130507-11). The new final
regulations generally follow the proposed regulations, but
with changes adopted in response to the numerous comments
the IRS received about the proposed regulations. The
comments addressed five main areas:

Calculation of net investment income;

Treatment of several special types of trusts;

Interaction between various aspects of the Sec. 469
passive activity rules with the calculation of net
investment income;

The method of gain
calculation regarding a sale of an interest in a
partnership or S corporation; and

Multiple
areas where the proposed regulations could be simplified.

Despite requests of commentators, the final
regulations do not contain a list of income or deduction
items that are excluded from the calculation of net
investment income.

The IRS also declined to exempt
the net investment income tax from the estimated tax payment
requirements, even though many investors cannot know until
the end of the year if a passthrough investment will
generate net investment income.

The IRS also
clarified that foreign income taxes are not creditable
against the net investment income tax because it is not
contained in chapter 1 of the Internal Revenue Code.

The final regulations retain the general structure for
calculating the net investment income tax from the proposed
regulations, with a few changes.

Comments the IRS
received on the 2012 proposed regulations identified two
issues that the IRS will study further. They are the
treatment of accumulation distributions from foreign trusts
and material participation of estates and trusts.

Tuesday’s proposed regulations propose various additions
and modifications to the final regulations, including
guidance on certain reserved paragraphs in the final
regulations. They propose special rules for certain
partnership payments; govern the treatment of certain
capital loss carryforwards; and deal with the treatment of
income and deductions from common trust funds, related to
residual interests in REMICs, and from certain notional
principal contracts. They also provide rules for the use of
the Sec. 664 system for applying Sec. 1411 to income
recipients for charitable remainder trusts with income from
controlled foreign corporations or passive foreign
investment companies but allow the use of the simplified
method that was included in the 2012 proposed regulations
for these purposes.

The topic of determining the gain
or loss on the disposition of interests in partnerships or S
corporations is reserved in the final regulations and is
dealt with in the proposed regulations.

The final
regulations are effective Dec. 2, upon their publication in
the Federal Register, and generally apply to tax
years beginning after Dec. 31, 2013. For tax years beginning
before Jan. 1, 2014, taxpayers can rely on the proposed
regulations or on the final regulations, but if a taxpayer
takes a position in a tax year beginning before Jan. 1,
2014, that is inconsistent with the final regulations, and
that position affects the treatment of one or more items in
a tax year beginning after Dec. 31, 2013, then the taxpayer
must make reasonable adjustments to ensure that the
taxpayer’s tax liability under Sec. 1411 is not
"inappropriately distorted" in tax years beginning
after Dec. 31, 2013.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

Magazine

Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient.